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Cost of Aging Soars

By Stella Dawson, Reuters

April 12, 2012

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People worldwide are living three years longer than expected on average, pushing up the costs of aging by 50 percent, and governments and pension funds are ill prepared, the International Monetary Fund said.

Already the cost of caring for aging baby boomers is beginning to strain government budgets, particularly in advanced economies where by 2050 the elderly will match the numbers of workers almost one for one. The IMF study shows that the problem is global and that longevity is a bigger risk than thought.

"If everyone in 2050 lived just three years longer than now expected, in line with the average underestimation of longevity in the past, society would need extra resources equal to 1 to 2 percent of GDP per year," it said in a study to be released in its World Economic Outlook next week.

For private pension plans in the United States alone, an extra three years of life would add 9.0 percent to liabilities, the IMF said in urging governments and the private sector to prepare now for the risk of longer lifespans.

Demographers for many years have assumed that the lengthening of lifespans would slow in developed countries. But with continual advances in medical technology, that has not happened as acutely as expected. In emerging economies, rising standards of living and the expansion of health care also are adding to lifespans.

To give an idea of how costly this could prove, the IMF estimated that if advanced economies were to plug the shortfall in pension savings of an extra three years immediately, they would have to stash away the equivalent of 50 percent of 2010 GDP, and emerging economies would need 25 percent.

These extra costs fall on top of the doubling in total expenses that countries can expect through 2050 from an aging population. The faster countries tackle the problem, the easier it will be to handle the risk of people living longer, the IMF said.

These estimates cover only pensions. They do not account for healthcare costs, which also rise the longer someone lives.

In a December 2009 study, the MacArthur Research Network on Aging estimated that Americans are living between three and eight years longer than commonly expected, adding $3.2 trillion to the Medicare and Social Security, the government-backed healthcare plan for the elderly and pension program.

In North America and advanced Europe, lifespans increased by eight years between 1970 and 2010, and are projected to increase by an additional four years through 2050 -- that's about five weeks more per year.

At the same time old-age dependency, or the ratio of population over 65 to those in the prime working ages of 15 to 64, is expected to increase from 24 percent to 48 percent of the total population in advanced economies by 2050 -- in other words roughly one worker for every retired person.

Emerging Europe has seen lifespans grow more slowly by 1.1 years in the 40 years to 2010 but can expect longevity to rise sharply by 6.8 years in the next 40 years, the IMF said. For emerging economies, their old-age dependency ratios are expected to rise from 13 percent today to 33 percent by 2050.

Steps governments can take to manage the risk of people living longer are to raise the retirement age, increase taxes to fund public pension plans and lower benefits -- all steps most advanced economies are already considering.

They also could help the private sector by educating citizens better on how to prepare for their retirements and by promoting retirement products that protect people against the risk that they outlive their assets.

"Although longevity risk is a slow-burning issue, it increases the vulnerability of the public and the private sector to various other shocks," the IMF said in its study.